Risk Management of Risk Under the Basel Accord: Forecasting Value-at-Risk of VIX Futures

31 Pages Posted: 21 Feb 2011

See all articles by Chia-Lin Chang

Chia-Lin Chang

National Chung Hsing University - Department of Applied Economics, Department of Finance

Juan-Angel Jiménez-Martin

Complutense University of Madrid

Michael McAleer

Erasmus University Rotterdam - Erasmus School of Economics, Econometric Institute; Tinbergen Institute; University of Tokyo - Centre for International Research on the Japanese Economy (CIRJE), Faculty of Economics

Teodosio Perez Amaral

Complutense University of Madrid - Facultad de Económicas y Empresariales

Date Written: February 20, 2011

Abstract

The Basel II Accord requires that banks and other Authorized Deposit-taking Institutions (ADIs) communicate their daily risk forecasts to the appropriate monetary authorities at the beginning of each trading day, using one or more risk models to measure Value-at-Risk (VaR). The risk estimates of these models are used to determine capital requirements and associated capital costs of ADIs, depending in part on the number of previous violations, whereby realised losses exceed the estimated VaR. McAleer, Jimenez-Martin and Perez-Amaral (2009) proposed a new approach to model selection for predicting VaR, consisting of combining alternative risk models, and comparing conservative and aggressive strategies for choosing between VaR models. This paper addresses the question of risk management of risk, namely VaR of VIX futures prices. We examine how different risk management strategies performed during the 2008-09 global financial crisis (GFC). We find that an aggressive strategy of choosing the Supremum of the single model forecasts is preferred to the other alternatives, and is robust during the GFC. However, this strategy implies relatively high numbers of violations and accumulated losses, though these are admissible under the Basel II Accord.

Keywords: Median strategy, Value-at-Risk (VaR), daily capital charges, violation penalties, optimizing strategy, aggressive risk management, conservative risk management, Basel II Accord, VIX futures, global financial crisis (GFC)

JEL Classification: G32, G11, G17, C53, C22

Suggested Citation

Chang, Chia-Lin and Jiménez-Martin, Juan-Angel and McAleer, Michael and Perez Amaral, Teodosio, Risk Management of Risk Under the Basel Accord: Forecasting Value-at-Risk of VIX Futures (February 20, 2011). Available at SSRN: https://ssrn.com/abstract=1765202 or http://dx.doi.org/10.2139/ssrn.1765202

Chia-Lin Chang

National Chung Hsing University - Department of Applied Economics, Department of Finance ( email )

Taichung, Taiwan
China

Juan-Angel Jiménez-Martin (Contact Author)

Complutense University of Madrid ( email )

Complutense University of Madrid
Campus de somosaguas
Pozuelo de Alarcon, Madrid 28223
Spain
+34 91 3942355 (Phone)

HOME PAGE: http://www.ucm.es/fundamentos-analisis-economico2/jajm

Michael McAleer

Erasmus University Rotterdam - Erasmus School of Economics, Econometric Institute ( email )

Rotterdam
Netherlands

Tinbergen Institute

Rotterdam
Netherlands

University of Tokyo - Centre for International Research on the Japanese Economy (CIRJE), Faculty of Economics

Tokyo
Japan

Teodosio Perez Amaral

Complutense University of Madrid - Facultad de Económicas y Empresariales ( email )

Madrid, 28223
Spain

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